For a European Approach to R&D Expenses Qualifying for the Common Corporate Tax Base Super Deduction

Research and Development (R&D) is one of the main objectives of the European Union. One of the five targets of the European Commission for the EU in 2020 is that expenditure in R&D amounts to 3% of the EU’s GDP. This is a significant increase that will require innovative solutions to reach

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Quick Facts

Background

The drop in economic activity following the financial crisis of 2008 has highlighted the need to find new sources of economic growth. Innovation is one such source, which many believe is underutilised in Europe.

It is widely agreed that technological change is an important contributor to long-term growth, but research and development of new technologies is risky. In the end the benefits of the labour investment could go to a competitor. That is precisely why governments try to incentivise research and development (‘R&D’) and reward companies that invest in new technology. R&D is one of the main objectives of the European Union and has recently been emphasised even more heavily.

Research and Development (R&D) is one of the main objectives of the European Union. One of the five targets of the European Commission for the EU in 2020 is that expenditure in R&D amounts to 3% of the EU’s GDP. This is a significant increase that will require innovative solutions to reach. A vast majority of studies conclude that tax incentives stimulate investment in R&D and could be an important means to reach this goal. However, the R&D incentives that are in place in Europe today cause many difficulties.

At the end of 2016 the European Commission proposed a Common Consolidated Corporate Tax Base (CCCTB) as a solution to the above challenges. The aim of this initiative is to consolidate the tax calculation of EU Member States which should improve the Single Market for businesses by reducing administrative burdens, compliance costs and tax obstacles for companies operating in multiple EU Member States.

In particular, with regard to R&D tax incentives, the CCCTB provides a definition of this activity, but does not explain which expenses will qualify for a reduction.

Aim

The aim of the project is to elaborate a harmonised list of eligible expenses and an explanatory memorandum. For instance, with respect to depreciation allowance, it could be accepted that if related assets are only partly used for R&D eligible projects, application of an allocation key assessed on proportional eligibility with a criteria based on time spent on a pro-rata basis; for R&D staff cost, it should be determined which are the eligible staff: R&D engineers probably, and technicians dedicated, at least partly, to eligible projects. What are eligible expenses then? Wages, bonuses, benefits in kind and compulsory social security contributions?

The task at hand requires substantial research into the current schemes of the different Member States and would have to take into account different definition options.